FBR’s 2MFY20 report card

This is probably the first time ever, when monthly tax collection data is scrutinised and debated within and outside economics circles. Before this year, monthly tax collection data was reported by the media, but unlike inflation or items under balance of payment account, monthly tax numbers hardly caught the kind of attention it is receiving these days. Does anyone know the reason why?

Anyway, before assessing the adequacy of FBR’s collection for 2MFY20, a caveat is worth pointing out. Chairman FBR tweeted from his unverified account that by the end of August 2019, FBR had collected Rs580 billion, “which is 90 percent of the target of RS644 billion” set for the first two months. Contrary to this tweet, this newspaper reported that the two-month collection stood at Rs576 billion whereas two other media houses put the number at Rs578 billion and Rs574 billion.

Since Shabbar says he is in serious mood for various kinds of reforms at the FBR, he would be doing a great service if he tasks his team to periodically update FBR’s publications and set up a tax data portal with tax collection, targets, tax gaps, tax potential and other relevant information such as sectoral studies or studies relating to smuggling, as does the central bank through its website.

Going by Shabbar’s tweet, Rs580 billion is about 10.4 percent of total collection of Rs5,555 billion budgeted for this fiscal year. This is lower when compared to two-month performance in the last two years. Then again, this year’s number (10.4%) is not entirely comparable with the last few years because budgeted tax target is huge this year, whereas GDP growth is slower than yesteryears, and there have been some new tax measures – such as removal of sales tax zero rating, notifications to doctors, schools and what not.

Some critics argue that FY20’s full year target of Rs5,555 billion over last year’s actual collection of Rs3,820 billion requires FBR to set a growth target of about 45 percent for each passing month. By that account, the two-month target should have been Rs722 billon instead of Rs644 billion as Shabbar tweeted. Critics say that by setting lower targets in the first two months, FBR is pushing itself in the corner since growth target would have to be higher than 45 percent in third and fourth quarter to meet the budgeted target of Rs5,555 billion.

This may appear like a decent argument, except that historical data doesn’t support such neat and clean growth of equal percentage in monthly tax collection. There are many variables at play here, and as such the collective understanding of during-the-year swings and trends in FBR’s tax collection and their relationship with other factors of economy is little studied by Pakistan’s academia and think tank alike.

While growth in total collection in 2MFY20 is a far cry from what might be needed, it may well be so that year-on-year growth in last quarter may be much higher because of low base affect; year-on-year growth in monthly tax collection started weakening October 2018 onward, and averaged negative 5 percent between March and June 2019. Into fiscal year 2020 it has flipped upward, posting 10 percent and 20 percent growth in July and August 2019, respectively. It is important to note that sales tax growth has outstripped growth in other taxes despite slow growth in domestic demand, and falling imports, which also affects sales tax (at import stage) collection. Surely something is working.

The gist of the story is the same as BR Research’s last month’s coverage on taxation: FY20 target is huge and may well be unmet by June 2020 due to reasons discussed earlier. (See Does Shabbar have a magic spell? June 12, 2019). But seen in the context of FBR’s recent actions, including its notification drive and attempts towards data triangulation, growth in sales tax collection shows, there may still be some hope. Touchwood!